We're Dead-Eyes All Right--Right in the Foot

Most self-storage operators set themselves up for the most vicious type of business
pressure. The story of unbridled price competition needs to be told.

I have usually danced around the subject, trying to avoid any doom-and-gloom
expressions about troubling aspects of the industry. After all, this is a family show. But
words like "quicksand" and "quagmire" spring to mind when dealing with
straight price competition. The causes and effects are well-known.

"Location" distinguishes some facilities from others, but additional building
is diminishing that distinction in many areas. There are regular references in this
magazine and in the recent Inside Self-Storage Factbook about
"saturation" and overbuilding. The subject is on the table.

Our Soft Underbelly

The industry has this dark side, and most offerings are a commodity. Such offerings are
quite susceptible to aggressive price competition. That's the soft underbelly of
self-storage ownership.

Let's trace the buy/sell dynamics of a commodity market. The best example is the
agricultural commodity markets. The exchange itself (Chicago Mercantile Exchange) defines
for each category (November wheat, April porkbellies, etc.) all the important features of
each traded item. Those are primarily the quantity/sale, grade or quality, delivery point
and terms. All are carefully and deliberately standard. People throughout the world can
buy and sell, knowing exactly what they're doing. Bidding sets the price. No one knows in
advance what that will be. Such is the fate of agricultural-commodity suppliers.

The Prospect Needs a Reason ... Anything Will Do

Every buyer must have a reason, some difference, on which to base his purchasing
decision. He cannot act without one. When confronted with a situation where everything
(including price) is the same, the prospect must resort to something exterior to the
situation to permit him to act. He may flip a coin, choose the facility with the name that
comes first in the alphabet. Ridiculous? Not when the prospect needs to do something and
can't discern any difference. He knows that he's done something goofy, but your marketing
program didn't give him any choice.

It's Just a Matter of Time

When the first facility goes up in a given area, it probably underserves it. The owner
may have limited capital or ground or is conservative (or his bank is). So there is market
space for another facility, and when it goes in, nothing much happens. They're both full.
It seems that additional units can be added with impunity. But lurking in the economic
landscape is a cliff. And the arrival at the precipice is sudden. When the additional
units being added finally exceed the area need and facilities are experiencing
unacceptable vacancy, any operator's single recourse is to differentiate itself by
dropping rates.

How Far Is 'Down'?

The facility has to drop rates below those of its rivals or there is still no reason
for the prospect to act. By how much? Enough to give the prospect reason to stop shopping.
That can be very little if the prospect is tired of bargaining for nickels. With
self-storage, the whole process seems a little silly because our rates just aren't that
high. Is there a real difference between $45 and $47 per month? Nope. The issue here is in
providing the prospect with some way--any way--to distinguish one choice from another and
permit a prospect to make that decision. It's imperative. He's stuck until he does. That's
how the spiral begins. If just meeting the competition were enough, then prices might
stabilize. But the fact that the price must beat the other guy forces the downward spiral
until something enters the equation to stop it. Is it any wonder that this process tempts
suppliers to get with their brothers to stop the rate slide? In so doing, they risk the
farm, but that may seem like a reasonable risk, given the box they're in.

The tragic thing is that as the price drops, no additional units are being sold. The
price elasticity of self-storage is already very low, so lowering the price just means
that the amount of collective income from all units sold drops, and nothing good accrues
to the facility owners for the sacrifices they make. They just hope that the problem blows
over.

Operators are in that fix because they choose not to distinguish themselves to
prospects. Little in the original development cycle is aimed at preventing the condition.
There is an inherent attitude that, indeed, we are offering a commodity and the smartest
thing we can do is control costs. Initially, refuge is taken in citing their unique
location as the distinct feature. But that can be ephemeral.

The Scary Part

How far can prices drop? Where's the floor? Unless there is a demand upsurge, they will
drop until it is costing (in actual cash outlay) a facility more to supply the next unit
(called the marginal unit cost) than it is receiving in income. When that happens, some
suppliers will quit. They will not/can not expend cash to stay in the market. They drop
out--and save the day for their rivals. The supply is now diminished by the capacity of
the drop-out and the prices can stabilize.

In self-storage, what is that marginal unit cost? Well, how much in actual cash outlay
does it take to rent one more unit? Damn little. In those cases where there are facility
managers, I suggest to you that that the cost of renting the next unit is zero.
Thus, there is no barrier to a drop in prices in this industry. That's scary.

Also, prospects will get onto the act and egg you on for discounts and deals. The devil
in that situation is that the representations by prospects while bargaining are not
reliable. He says that Pete's Storage just offered him $45. Will you match that? You're at
$50. You agree to $45. Pete finds out. Guess where Pete's next rate quote will be?

But do you believe the prospect remarks about Pete? I don't. He says that at $45, the
contract is yours. We know that he needs a clear reason to buy. That means that Pete was
probably at $47 and he's pushing you to get that distinctive difference. But should you
have met the prospect bid? You, reader, take it from there. That's the price spiral. For
prospects, it's a game; for you, it's a lot more.

Prospects Are Rookies

The prospect's situation affects yours. Most prospects are rookies at buying
self-storage. Because any buying decision can be stressful, the buyer wants the process to
be as easy as possible. Thus, his inclination is to try to boil off all the features in
the various facilities' offering choices to nothing, freeing him to simply choose the
lowest cost. Nothing is easier than choosing the "cheapest." Even rookies can do
that. That opens the way for the above sequences to kick in.

Too Conceptual?

Once you are in the price war, there is little you can do. The only indemnity is
prevention if you wish to avoid this quagmire. You simply cannot permit yourself to be
seen as the same as your competition. To overcome the desire of the buyer to see all
offerings as the same takes some effort. Time for a dose of marketing!

Harley Rolfe is a semi-retired marketing specialist whose career includes
executive-level marketing positions with General Electric and AT&T. He also owned
lodging and office facilities for more than 20 years. Mr. Rolfe holds a bachelor's degree
in economics from Wabash College and a master's degree in business administration from the
University of Indiana. He can be reached at his home in Nampa, Idaho, at (208) 463-9039.
Further information can also be found in Mr. Harley's book, Hard-Nosed Marketing for
Self-Storage.